I received the below email from a dealer questioning his managers’ practices in their used vehicle department.  My answer follows.

Hi Dale,

I love ideas of the vAuto velocity management concepts as applied to used vehicle management.  I have several questions for you regarding it. Thank you for taking time to read it.

90+ days in Inventory

We are on AutoTrader as alpha and cars.com. Our SRP to VDP conversion average was 1.72% for ATC and 2.86% for Cars.com. On average, we get about 8,300 VDP’s on ATC per month and 7,300 for Cars.com per month average. We are getting our prices listed within 3 or 4 days and 86% of our inventory is pictured (the remaining is because the vehicle hasn’t been recon’d yet). Our recon average is close to 14 days! I know it’s absolutely ridiculous, but we are planning on making big changes. Lastly, we have no strict turn policy in place, and make occasional price adjustments using VinSolutions market pricing. We are thinking about getting back on board with vAuto, FirstLook, or AAX and begin to manage our used vehicle department much better.

Then comes into play our 2 Sales Managers that “manage” our used vehicle department. Our sales department is combined (new & used) as well as management. I just recently brought most of these numbers to the attention of our 2 sales managers and attempted to explain the numbers and issues.

Both of these guys are paid on gross (front and back) and tend to focus entirely on gross per unit with no sense of managing anything else related to used vehicles.

I explained that that used vehicle management is like managing investments, and should be measured using primarily, ROI [(gross/cost)*(365/Vehicle Age)], Day’s Supply and Turn Rate. I also like to calculate ROI adding holding cost to gross [ (total used dpt. expenses - variable expenses)/ 12 months. Then divide by 60 day supply of units. Then divide by 30 days. ] Are these metrics that you would use to measure for a used vehicle department?

When we talked about the importance of the day’s supply and turn rate I thought a good goal would be to get to 60 days, and then to 45 days with a 60 day hard turn policy. They kept saying “what about the vehicles that are 90 days old and we made $2,500 or $3000?” I tried to explain that, because it sat for so long, we didn’t really make any money when factor in holding costs, etc. Then they said that if they would have wholesaled the vehicle, even at the price they bought it at, at 60 days, they would surely lose money because of the added transportation costs, recon costs, etc. This is the part that I am confused about. Do velocity dealers have big wholesale losses due to vehicles not being retailed and then wholesaled after 60 days for example? The next issue they bring up is that the used vehicle market is high right now, and they can’t buy them very cheap.

I feel like I may have rambled a bit, but hopefully you get a feel for our situation that we are in right now. Any recommendations for our used vehicle department on where to begin getting better?  Or, how to help me educate and change our way of thinking?

Thanks so much for your time, and I wish you a great new year! JC

JC,

Thanks for your note.   With all due respect to your two “sales managers”, they are absolutely, positively clueless as to how to run a profitable used car department in the 21st Century.  The first premise for this conclusion is that they report profit from a department that in 2011 averaged 55 units per month, with an average dollar days’ supply of 100 and unit days’ supply of 87; dollars turn was 3.6 and units turn was 4.14.  I want you to understand that permitting vehicles to age as your managers seem to do, allows for a  glimpse of profitability that has not actually been earned.  If you wrote the aged vehicle inventory down to its true market value every month and applied that write-down amount to your so-called earned gross profit, you’d quickly realize that you earned no money at all.

As far as your sales managers claim that it’s OK to allow vehicles to age because when they sell they make a $2,500 profit, they are clearly focusing on the exception rather than the general rule.  Since everyone knows that cars depreciate over time (even in this hot wholesale marketplace), if your sales managers have found a way to consistently reverse this fact, then they are truly magicians and should be selling anti-age potions drawn from the fountain of youth.    As you recognized, your sales managers also fail to understand the most basic principles of economics; specifically, that they could have sold three units for $1,500 profit for each (plus F&I) in the same time that they sold one unit in 60+ days.  Somebody should explain the concept of opportunity costs to these two geniuses.

With respect to their claim that they can’t buy cars in today’s market for the right money that allows them to make a profit, this is clear evidence that they belong to a pre-historic period.  Somebody should tell your managers about people like Cary Donovan of the Swope Organization (Louisville, KY), Rich Kelley of the Germain Organization (Columbus, OH), Trent Waybright of Kelley Automotive (Fort Wayne, IN), or Keith Kocourek of Kocourek Motors (Wausau, WI).  These guys and many others do it every day, all day long.

JC, my friend, your two managers need to be either sent back to school or to the scrap heap.  Operations like those that I referenced above keep a 30 day’s supply of inventory or less, turn their inventory at retail 12-18 times per year, have zero wholesale loss, make ridiculous large departmental profit and importantly, have a loads of fun doing it.  They love to compete against stores like yours.

Respectfully, Dale

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